01—Abstract
Summary
Summary of the 10-K filed February 25, 2008. Cited figures are marked; the original filing is the authoritative source.
Southern Company's 2007 Form 10-K (filed February 25, 2008) reports net income of $1.73 billiona, up 10.2% from $1.57 billion in 2006, with basic EPS of $2.29 (diluted $2.28) versus $2.12 a year earlier.
The increase was driven mainly by a warm summer and favorable state regulatory actions, partly offset by higher non-fuel O&M, interest expense, and depreciation tied to environmental and reliability investments. Excluding synthetic fuel earnings, EPS was $2.21b. Operating revenues rose to $15.35 billion, and the company ended 2007 with $45.8 billion in total assets.
The company faces a sizable and rising capital and regulatory agenda. The construction program is estimated at $4.5 billionc for 2008, $4.8 billion for 2009, and $4.3 billion for 2010, including roughly $1.8 billion of environmental spending in 2008. Georgia Power's 2007 Retail Rate Plan adds base rate and environmental cost recovery increases effective January 2008, and the Kemper County IGCC project and new nuclear options are in development.
Key risks include the EPA New Source Review suits against Alabama Power and Georgia Power, the Mirant-related litigation seeking over $2 billiond from MC Asset Recovery, IRS challenges to roughly $330 million of SILO tax benefits, and a FERC generation-dominance proceeding with potential refunds of up to $19.7 million. The company also took a $17.6 million pre-tax loss (about $10.7 million after tax) at Southern Power from canceling the gasifier portion of the Orlando IGCC project, and its synthetic fuel investments ended December 31, 2007. The dividend was raised to $1.595 per share for 2007, with a 40.25-cent quarterly rate in 2008.
The payout ratio was 69.5% overall and 72% excluding synthetic fuel earnings, against a targeted ~70%. Management reports a stable financial condition, operating cash flow of $3.4 billion, and investment-grade ratings across the system.
02—Key points
Key Highlights
- Net income of $1.73 billion, up 10.2% year over year; basic EPS $2.29 vs. $2.12 in 2006 ($2.21 excluding synthetic fuel).
- Operating revenues of $15.35 billion, up about 7% from $14.36 billion, with retail revenue growth driven by rate actions and fuel cost recovery.
- Construction program of $4.5B (2008), $4.8B (2009), $4.3B (2010), with environmental compliance capex of about $1.8B in 2008.
- Georgia Power's 2007 Retail Rate Plan (2008-2010) added about $99.7M base rate and $222M environmental (ECCR) increases effective January 1, 2008.
- Significant litigation exposure: EPA NSR suits, Mirant/MC Asset Recovery claims over $2 billion, and IRS SILO challenges involving about $330M of claimed tax benefits.
- Dividend of $1.595 per share paid in 2007, with 40.25 cents per quarter declared for 2008; payout ratio of 69.5% overall.
- Southern Power took a roughly $17.6M pre-tax loss from terminating the gasifier portion of the Orlando IGCC project; synthetic fuel tax credits expired December 31, 2007.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 25, 2008Financial Statements
| Revenue | $15.35B |
| Operating Expenses | $12.03B |
| Operating Income | $3.33B |
| Net Income | $1.73B |
| EPS (Basic) | $2.29 |
| EPS (Diluted) | $2.28 |
| Shares Outstanding (Basic) | 756.00M |
| Shares Outstanding (Diluted) | 761.00M |
05—Questions
Frequently Asked Questions
What drove the increase in Southern Company's 2007 earnings?
Net income rose 10.2% to $1.73 billion, mainly because of a warm summer that boosted electricity sales and favorable state regulatory actions, including Alabama Power's Rate RSE increase. Higher allowance for equity funds used during construction and a tax benefit from the Tallulah Gorge land donation also helped. These gains were partly offset by higher non-fuel operating expenses, interest costs, and depreciation.
How large is the company's capital spending plan, and what is driving it?
The construction program is estimated at $4.5 billion in 2008, $4.8 billion in 2009, and $4.3 billion in 2010. A large share is environmental compliance (about $1.8 billion in 2008) for Clean Air Act requirements, plus transmission, distribution, and new generation. Management notes that actual costs may vary and that recovery of all costs is not assured.
What are the biggest legal and regulatory risks disclosed?
The main risks are the EPA New Source Review suits against Alabama Power and Georgia Power, the Mirant bankruptcy-related claim by MC Asset Recovery seeking more than $2 billion, IRS challenges to about $330 million of SILO-related tax benefits, and a FERC generation-dominance proceeding that could require cost-based rates and refunds of up to $19.7 million. Management says it is vigorously defending these matters and cannot yet determine their outcomes.
Is the dividend secure, and what is the payout policy?
The company has paid dividends since 1948 and has raised them each year, with $1.595 per share paid in 2007 and a 40.25-cent quarterly rate declared for 2008. Its target payout is about 70% of earnings excluding synthetic fuel; the actual ratio was 72% excluding synthetic fuel and 69.5% overall. Because the holding company depends on subsidiary dividends, its ability to pay depends on those subsidiaries' earnings and cash flows.
Did the company's synthetic fuel business affect 2007 results?
Yes. Synthetic fuel investments produced federal tax credits that offset operating losses, and those credits expired December 31, 2007. Management reports EPS both including and excluding synthetic fuel earnings: $2.29 and $2.21 for 2007. Excluding these earnings gives a cleaner view of ongoing operations, and the company has exited the business.
06—Continue